Total 20 Questions 19 Multiple choice and 1 calculation Mult

Total 20 Questions (19 Multiple choice and 1 calculation). Multiple choice 5 points/ Calculation question-10 points: Total 105 points 1. The market-required rate of return on a bond that is held for its entire life is called the: A. coupon rate. B. yield to maturity. C. dirty yield. D. call premium. E. current yield. 2. Soft and Cuddly is considering a new toy that will produce the following cash flows. Should the company produce this toy based on IRR if the firm requires a rate of return of 17.5 percent? Year Cash Flow 0 $132,000 97,000 42,000 28,000 2 A. Yes, because the project\'s rate of return is 16.45 percent B. Yes, because the project\'s rate of return is 11.47 percent C. No, because the project\'s rate of return is 16.45 percent D. No, because the project\'s rate of return is 11.47 percent E. No, because the internal rate of return is zero percent

Solution

1.

Correct option is > B. Yield to Maturity

Yield to maturity is the current or market interest rate on bond that is held till maturity

2.

Correct option is > C. No, because the project’s rate of return is 16.45%

As requited rate is 17.5% and calculated rate of return on basis of cash flow is less than required rate hence, we should reject the project. Please check the table below for rate of return calculation.

IRR is obtained by trial and error and at 16.45% the total PV of cash flow becomes near to zero.

Rate = 16.45%

PV

Year

CF = Cash flow

Df= 1/(1+16.45)^Years

Df x CF

0

-132000

1.000000

-132000.00

1

97000

0.858738

83297.55

2

42000

0.737430

30972.08

3

28000

0.633259

17731.26

Total of PV = NPV

                     0.89

		Rate = 16.45%	PV
Year	CF = Cash flow	Df= 1/(1+16.45)^Years	Df x CF
0	-132000	1.000000	-132000.00
1	97000	0.858738	83297.55
2	42000	0.737430	30972.08
3	28000	0.633259	17731.26
		Total of PV = NPV	0.89